This year Dutch budget day was overshadowed by the early stages of the formation of a new Dutch government. During the general election campaigns – the Dutch voted last week – many proposals were floated that are incompatible with the outgoing Dutch government's plans. Nevertheless, the Dutch government presented a substantial package of tax measures for 2013 (the "2013 Tax Proposals") yesterday. Together with the recently introduced rules on the deductibility of interest on participation loans and an increase of the general VAT rate from 19 to 21 per cent, these proposals are aimed at keeping the Dutch budget within EU deficit limits. Below we highlighted three of the proposed measures that are relevant for corporate taxpayers when structuring in or through the Netherlands. We will keep you updated of changes pursuant to the new Dutch government's formation, but expect most significant changes to be made to the taxation affecting domestic individuals.
- Abolition Dutch thin capitalization rules
At the time the interest deduction limitations regarding interest due in respect of loans that are deemed to be related to the financing of participations were introduced – earlier this year – the Dutch government indicated that the Dutch thin capitalization rules would be abolished if and when budget permits (we refer to our Tax Alert of 5 June 2012). This statement was met with some skepticism in view of the current economic climate. However, in the 2013 Tax Proposals the Dutch government has made good on its promise, but we will have to wait and see if the prospective new government's budget will also permit the abolition. This abolition makes the Dutch interest deduction limitations more tailored towards abuse and provides some simplification of the Dutch rules on the deductibility of interest.
- Dutch tax liability for foreign corporate taxpayers in respect of management fees
Under current Dutch domestic law, a non-Dutch resident entity is in principle subject to Dutch corporate income tax in respect of activities that are performed in its capacity as board member of a Dutch resident entity. According to most tax treaties concluded by the Netherlands, in accordance with article 16 of the OECD model convention (directors' fees), the Netherlands can effectuate this levy on fees derived by a non-Dutch resident entity in its capacity as board member of a Dutch resident entity. It follows from Dutch case law that the term "board member" should generally be formally interpreted as the person that forms part of the body that according to the applicable law and articles of association is responsible for managing the entity.
The 2013 Tax Proposals widen the scope of liability for Dutch corporate income tax to management activities and services – i.e. outside of the scope of formal board membership – performed by a non-Dutch resident entity in respect of a Dutch resident entity. It should be noted that in tax treaty situations, this extension will generally not have effect if the relevant tax treaty contains a directors' fee article in line with article 16 of the OECD model convention. Only in the event that the tax treaty contains a provision pursuant to which the fee derived by reason of exercise of such management activities and services may be taxed in the country in which the entity for which those activities and services are performed, is resident (i.e. the Netherlands), can this extension of Dutch domestic taxing jurisdiction be effectuated. One of the tax treaties concluded by the Netherlands that contains such a specific provision - and for which this extension is particularly relevant - is the treaty with Belgium.
- At least 95% of the statutory voting rights required to enter into CIT fiscal unity
Upon request Dutch resident entities can enter into a fiscal unity for Dutch corporate income tax purposes ("CIT fiscal unity"). The advantages of a CIT fiscal unity are, amongst others, that as a general rule all profits and losses of the entities that form part of the CIT fiscal unity can be off-set and all transactions entered into between these entities are generally ignored for the determination of the taxable profits. In order to form a CIT fiscal unity certain conditions should be met, one of which is that the parent company should hold the legal and beneficial ownership of at least 95% of the nominal paid-up share capital of the subsidiary. With this condition the legislator wanted to express that the parent company should also hold at least 95% of the voting rights in the subsidiary.
The entry into force of the Act for simplification and flexibilization of private company law and the Implementation Act thereto (together "Flex-BV Act") as per 1 October 2012 will ease a larger number of corporate provisions. Furthermore, the Flex-BV Act introduces possibilities to deviate from the provision of the law in the articles of association (we refer to our Corporate Alerts of 12 June 2012 and 9 November 2010). Under the Flex-BV Act, the articles of association may for instance provide for shares to which no voting rights are attached (such shares must, however, be entitled to distribution of profits and/or reserves).
As per 1 October 2012 this could in theory result in a situation in which a parent company holds the legal and beneficial ownership of at least 95% of the nominal paid-up share capital of the subsidiary, whereas the parent company holds less than 95% of the voting rights in the subsidiary. In the 2013 Tax Proposals it is therefore proposed that in order to enter into a CIT fiscal unity the parent company should in addition to the legal and beneficial ownership of at least 95% of the nominal paid-up share capital of the subsidiary:
- also hold at least 95% of the statutory voting rights in the subsidiary; and
- always be entitled to at least 95% of the profits and assets of the subsidiary (this condition already applies pursuant to a ministerial decree).
According to the Under-Minister of Finance, these amendments should have no consequences for existing CIT fiscal unities that have been entered into in accordance with the currently applicable legislation.
- Final remark
As discussed, the 2013 Tax Proposals have been published by an outgoing Dutch government with limited powers. Negotiations on a new Dutch government are currently in process following the general Dutch elections of Wednesday 12 September 2012. Depending on the outcome of these negotiations and the composition of the new Dutch government, the 2013 Tax Proposals may be further amended as it is guided through the new Parliament. Expectations are that measures geared towards domestic individuals are more likely to be affected by the negotiations than the measures described above, but the need to keep the budget deficit below 3% may increase the pressure on these measures too. We will keep you informed of any developments that may be important.